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2019-10-11 03:21:26

Investment thesis

Since our previous release on the United States Gasoline ETF LP (UGA), our constructive positioning has not arisen and the ETF declined moderately, down 3.49% to $29.63 per share, as gasoline fundamentals weakened.

In spite of that and even if speculator interest for the motorist blend is on an upward path, we believe that U.S. gasoline storage excess, low gasoline crack spreads and weakening demand for the motorist blend continue to weigh on the complex and its proxy, UGA.

Source: Tradingview

U.S. gasoline storage edged slightly lower during the week, but excessive stockpiles and waning crude oil demand dynamics indicate that UGA is heading further south

Latest EIA report shows that stockpiles of gasoline declined marginally, during the week ending September 27, down 0.1% (w/w) to 230m, whereas RBOB pricing decrease slightly more, down 1.74% on the corresponding period.

With this slim decrease, seasonality of U.S. gasoline storage slightly deteriorates (w/w), weakening its surplus to 3.4% or 7 608k barrels compared to the 5-year average and the yearly deficit improves marginally (w/w) to 2.2% or 5 245k barrels.

Source: EIA, Oleum Research

That being said, the gasoline storage picture remains moderately bearish, given the slim five-year surplus, yet, with oil refiners entering the maintenance season, stocks are expected to continue to decline and should continue to weigh on this soft storage surplus and thus, provide some support for UGA shares.

Source: EIA, Oleum Research

Besides, and given that gasoline prices are a by-product of crude oil, oil dynamics are weakening, following a declining demand that will probably continue to weigh on prices. Indeed, according to the New York Fed, demand has been weak since July 1 and has now entered a declining path, which provides headwinds for gasoline futures and its proxy UGA shares.

Speculative bets

Source: CFTC

Net speculative positioning on Nymex gasoline futures declined robustly during the October 24-September 1 period, down 7.18% (w/w) to 52 410 contracts, the CFTC shows.

While this has been mostly due to fresh short accretions, up 6.63% (w/w) to 66 794 contracts, long accumulations marginally offset that, up 0.08% (w/w) to 119 204 contracts.

Furthermore, net spec bets lifted robustly in September, up 12.08%, indicating a renewed interest for the motorists blend. This is also confirmed by the open (35.13%) and short open interest (33.2%) that are now stretched compared to their respective 20-week average of 35.13% and 19.68%, indicating that gasoline futures are close to an important price move.

Yet, for the time being, the sentiment remains slightly bullish, following the comfortable appreciation witnessed in the past month, indicating that speculators are somewhat sustaining UGA shares.

Since the beginning of 2019, speculators reduced robustly their bets on the gasoline complex, down 36.78% or 30 487 contracts, whilst UGA’s YTD performance lifted healthily, up 22.76% to $29.23 per share.

With gasoline supply-demand balance loosening for the third consecutive week and gasoline crack spreads remaining low, weakness on UGA shares will persist

During the week ending September 27, the weekly gasoline supply-demand equilibrium continued to loosen, establishing now in a surplus of 837k barrels per day, up 22.37% (w/w). This sharp appreciation is mainly attributable to a decelerating demand for the motorists’ blend, down 2.24% (w/w) to 9 137k barrels per day that was marginally counterbalanced by lifting gasoline exports, up 14.29% (w/w) to 920k barrels per day. With these developments, the gasoline complex is likely to remain under pressure, further weighing on UGA shares.

Source: Oleum Research

Concomitantly, gasoline cracks doubled since the sharp correction seen at the end of August and are now evolving at $8.09 per barrel, sustaining somewhat the complex. Yet gasoline cracks are still subdued, following a weakening demand that is not able to cope with excessive refining supply.

Source: Quandl, Oleum Research

Besides and although the Brent future curve edged considerably lower since the end of the summer season, gasoline futures are evolving in a steep contango on short-term maturities, pointing towards an oversupply of the market which is negative for UGA shares.

Closing thoughts

That being said and in spite of speculators reducing considerably their bets on the motorists blend over the week, we believe that U.S gasoline storage excess, weakening demand for the motorist blend and subdued gasoline cracks are strong downward catalysts that will sustain the depreciation of UGA shares.

In this context, our view on the gasoline complex has changed and we are now bearish on the motorist blend and on its proxy UGA shares.

We look forward to reading your comments.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

seekingalpha.com @OleumResearch
gasoline demand blend weakening motorist shares excessive stockpiles week storage source down

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